Why OPEC Doesn’t Deserve Sour Grapes

By Benoit Faucon

Bloomberg

OPEC is already facing quite a few sour grapes for 2011.

The Organization of Petroleum Exporting Countries is bracing itself against demands from some of its members who want higher prices. At the same time, it is accused by consumers of not doing its bit to squash a new oil price hike as it refuses to lift a two-year cap on production.

But now, two senior economists have added complexity to the mix by likening oil to fine wine. In a working paper published Tuesday on the International Monetary Fund’s website, economists Serhan Cevik and Tahsin Saadi Sedik have found that oil prices are primarily driven by demand and a flow of liquidity into markets, instead of supply constraints.

They reached their conclusion after finding that fine wine prices—measured in an index of 24 Bordeaux chateaux–moved alongside crude oil in the past decade. Unlike OPEC for oil, no international producers’ group of stature exists for fine red.

Indeed, the working paper buries the long-held view that OPEC can move prices up and down solely by turning spigots on and off. Dead are the days of the oil shocks of the 1970s when blockades and revolutions threw wealthy economies into disarray.

Long live the demand shocks where price hikes are mainly driven by the roaring engine of fast-industrializing nations.

In times of growth, more people move away from cheap plonk and more can drive cars around.

So is OPEC up for retirement? Not so fast. Without driving prices, the authors suggest it may have helped stabilize them. So it may depend how well China and India manage their boom towns.

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